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Rubin Hay PC Law Blog

Wednesday, June 28, 2017

The Multigenerational Stand Alone IRA Trust – A Better Choice for Large IRAs

John J. Yagjian, Esq.

A Multigenerational Beneficiary Controlled Trusts (“MBCT”) is the ultimate in estate planning. By using a MBCT a parent, or grandparent, can provide lower generation beneficiaries of their choice with:

  1. greater economic benefits; and
  2. greater asset protection;

than would be available to these lower generation beneficiaries had the property been left to them outright.  This can all be achieved while, at the same time, providing almost the same (or less, if desired) control to the beneficiary as he or she would have were the asset left to the beneficiary outright.

In addition to eliminating the exposure of the assets to federal and state estate tax, and generation skipping taxes (thereby allowing the beneficiary to use his or her own exemptions for other assets), the MBCT can provide asset protection in the event of creditor lawsuits, bankruptcy or divorce with respect to the beneficiary1.

This structure works extremely well for most assets, but IRAs have special issues that cannot be best accommodated by a MBCT with other assets as well.  When an IRA owner (with no surviving spouse) dies with a large IRA balance (including any inherited IRAs), there are three options for passing this wealth along.

These options with a necessarily brief summary of some of the concerns, are:

First: Keep it simple and leave it directly.

The IRA can be left directly to one or more beneficiaries.  This option creates:

  • potential federal and state estate tax problems for the beneficiary ;
  • potential loss of the account through lawsuits or divorce;
  • potential loss of the account through Bankruptcy. There is no federal bankruptcy exemption for inherited IRAs, and
  • Potential loss of continuing deferral by beneficiary unnecessary withdrawals.

Second: Leave it to the Family Trust to be divided along with the rest of your assets.

The IRA can be left to a trust for the beneficiaries. Unless the trust is drafted in such a way as to qualify as a “Designated Beneficiary”, the benefit of stretching out the payments over a beneficiary’s life expectancy (an extremely valuable benefit) will be lost. There are a number of technical rules that must be incorporated into the trust in order to achieve the maximum economic benefit of continued deferral. Because the trust provisions regarding the IRA are constrained by the “Designated Beneficiary” rules, special care must be taken to coordinate these rule with the administration, allocation and distribution of other assets, and the powers, if any, given to the beneficiaries. It is even more difficult to incorporate the option to toggle between a “conduit trust” and an “accumulation trust,” in case circumstances may warrant an accumulation trust. Moving the IRA accounts to separate standalone trust that is specifically designed to deal with them, makes it much easier to achieve the client’s goals and objectives with his her other assets in trust.

Third: Leave it to a Flexible Stand-Alone Beneficiary Controlled Multigenerational IRA trust.

The IRA can be left to a separate IRA Stand Alone Trust, with separate default conduit trust shares, and a “toggle” provision to convert any of these trust shares to an accumulation trust share if that is a better asset protection choice given the fact and circumstances at the IRA owner’s death. For example, if accumulation of income is desired, or if lawsuits, divorce or bankruptcy may be on the horizon, the “accumulation trust” may be the preferred choice. Because this trust is tailored to receiving only IRA assets the provisions are tailored to insure maximum distribution, maximum asset protection and the ability to continue this asset stream for multiple generations. Currently Trusts have income tax brackets that are more compressed than individual brackets. This concern may be alleviated in a number of ways. For examples distributions still could be made, much like the conduit trust. If the beneficiary is in a high income tax bracket, the tax difference will not be as much of a concern.

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Rubin Hay is a law firm in Framingham and Newton, Massachusetts, that delivers exceptional results in the areas of estate planning, elder law, probate, business law and real estate law. We assist families, individuals, and businesses in Newton, Wellesley, Natick, Framingham and the surrounding areas.

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1 Although Massachusetts is one of a few states that provides some bankruptcy and creditor protection for inherited IRAs, the inherited IRA is not protected in the case of an order concerning divorce, separate maintenance or child support. See M.G.L. Chapter 235, Section 34A.


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